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The Value of Government Ownership during Financial Crisis: The Case of Air New Zealand
Dr Monique Cikaliuk, New Zealand Leadership Institute, The University of Auckland
Dr Ljiljana Erakovic, The University of Auckland Business School
Professor Brad Jackson, School of Government, Victoria University of Wellington
Associate Professor Chris Noonan, The University of Auckland
Professor Susan Watson, The University of Auckland Faculty of Law
Paper presented at the Ownership and Control After the Global Financial Crisis Conference
30-31 May 2014
Faculty of Law, The University of Auckland, Auckland, New Zealand
Comments on this paper are welcome and can be directed to [email protected]
Acknowledgements: We thank the University of Auckland Business School Strategic Research
Themes Fund (FRDF) and the University of Auckland Foundation on behalf of Paul Kelly for
generously providing funding for the research presented here.
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More than seven years have passed since the Global Financial Crisis (GFC), but the topic
of governance continues to command the attention of management scholars and practitioners
around the world. Interest in this topic has been increasing, as evidenced by citation counts, the
amount of time devoted to it at conferences, and the reforms undertaken domestically and
internationally. Undoubtedly, there are many reasons for this interest in the topic of governance.
It is closely associated with value creation which is an active research area of long standing
importance within agency theory (Fama & Jensen, 1983; Jensen & Meckling, 1976). Agency
assumptions are closely associated with the reform of governance process aimed at boards
globally. Along with the intense focus on the structure and composition of the board, other
alternative theories of governance are emerging. Like agency theory, this focus is on core issues
of value creation through improved board governance. However, in contrast to the agency view,
the focus is on actual board behaviour and processes in and around the boardroom (Roberts,
McNulty, & Stiles, 2005; van Ees, Gabrielsson, & Huse, 2009). This approach features
theoretical pluralism which allows it to be distanced from the criticism leveled at the agency
perspective as being a static and negative view of human behaviour (Eisenhardt, 1989), thus
broadening its appeal. It also suggests an alternative to the self-serving side of human behaviour,
by positing a bounded rational actor capable of cooperation and acting ethically (Pugliese et al.,
2009). Its concern with the actual lived experience of directors and with processes for bringing
about change, such as coordinating, decision making, and managing complexity expands its
appeal as well (McNulty & Pettigrew, 1999; Rindova, 1999; van Ees et al., 2009). The
opportunity to advance research on the ‘inner workings of boards’ (Hermalin & Weisbach, 2003;
Pettigrew, 1992; Roberts, McNulty & Stiles, 2005) has yielded a growing body of research that is
contributing to a richer understanding of the dynamics of board behaviour while also fostering a
certain amount of debate.
The motivation for our current work was to understand the influence of concentrated
share ownership when the major shareholder was the Crown (aka the state) on the governance
processes within the board, between the board and CEO, and with the major shareholder
following an internally triggered crisis and the subsequent GFC. To facilitate this aim, in this
paper we have chosen to focus on the transportation sector because this sector has been
characterised by rapid, often dramatic change (Backx, Carney, & Gedajlovic, 2002; Dempsey,
2008). In this environment it seemed reasonable to expect boards to put a particular effort into
developing effective leadership and governance processes for improved performance. Using a
case study, we undertake an analysis of large failed flagship carrier airline documenting its
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actions in effecting a successful turnaround to examine if and how this ownership structure
influences governance and leadership processes between the state and the board, within the board
and between the board and CEO.
Despite some progress made to date, an understanding of board behaviour is still in its
nascent form (Forbes & Milliken, 1999; Huse, 2005; van Ees et al., 2009). Although there is
general consensus that poor performance and poor governance are intertwined (Dailey, Dalton, &
Cannella, 2003), an understanding of the influence of ownership structure with board behaviour
remains contested. Relatively little is known about governance and boards of listed state owned
enterprises (SOEs). From an empirical point of view, the study of governance processes in listed
SOEs is rare. A study of boards of listed SOEs offers three benefits. First, it directs attention to
the nature of the ownership structure and the influence of these factors on the actions undertaken
by directors to develop and sustain performance often without any guarantee of success. Given
the contradictory empirical results of the effect of ownership structure on performance for listed
firms with some researchers finding empirical support (Shleifer & Vishny, 1997) whereas others
do not (Dalton et al., 2003; Hermalin & Weisbach, 2003), an assessment of the classic factors
(board size, CEO duality, insider/outsider ratio and the stock holding by board members)
provides initial insight and exploratory understanding of how ownership structure influences the
board’s contribution to firm’s performance in this distinct model of mixed ownership. Thus we
add to the governance literature by showing how these classic factors appear to affect the
performance of a listed SOE. Although these insights contribute to an exploratory understanding
of ownership structure on performance, we also extend our research to gain an understanding of
the behaviours of directors to develop and exercise good governance.
Second, we add to the methodological diversity for empirical studies of governance
(Leblanc & Schwartz, 2007; van Ees et al., 2009). A process perspective allows us to connect to
the rich process research which offers a wealth of methods and frameworks to be used to study
governance as a listed SOE. This provides an opportunity for us to connect to a major stream in
management research (see Pettigrew (1992) for a discussion of the literature).
Finally we identify the effect of concentrated share ownership for board dynamics when
the major shareholder is government. Our perspective on leadership and governance interactions
for board-shareholder, within the board, and board/CEO asserts how these interactions affect the
ability of the board to do its job and generate value. Our focus on board behaviour also leads us
to prioritize the interactions between and among the board of directors as at the centre of an
explanation about the relationship between boards and performance while recognising the effect
of structural attributes.
In advancing these contributions, our paper proceeds as follows. We discuss the
theoretical underpinnings of our study, and the key theoretical constructs pursued. The third
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section describes the research design and the selection of the case for the study. We then present
our empirical case data before going on to induce our theoretical insights. In the fourth section
we draw conclusions from the case analysis. Finally, the last section points to implications for
theory and practice as well as recognises the limitations of our study.
Theoretical Perspectives on the Ownership and Performance Relationship
The relationship between ownership and performance has emerged as a major theoretical
and empirical focus in the governance literature. Despite the high level of interest in this
relationship, the nature of the relationship remains contested. Agency theory, a dominant theory
in governance research, suggests that ownership influences firm performance because different
owners pursue dissimilar goals and possess disparate incentives (Fama & Jensen, 1983; Jensen &
Meckling, 1976). Thus the effect and consequences of incentive alignment is a critical issue. In
understanding the relationship between performance and ownership, the board and the actions of
the board in relation to performance are conventionally understood by four classic factors.
Known as ‘the usual suspects’ (Finkelstein & Mooney, 2003) these factors, which include
changes in board size, separation of CEO from the board chairmanship, the number of insiders
versus outsiders and the stock holding by board members, seek to assess board contribution
through its direction connection to the firm’s value creation. Some researchers contend, on the
one hand, there is a relationship between these factors and performance (Shleifer & Vishny,
1997). Empirical studies have examined these factors with particular attention to the composition
of the board, specifically the ratio of independent (external directors) and dependent (internal)
directors. They conclude the performance of listed firms is improved when there are a greater
proportion of independent directors than non-independent directors. Compared to non-
independent directors, outside directors provide better monitoring despite being less informed
about firm activities. Independent directors, as argued by researchers (Roberts et al., 2005) do
not suffer from distorted objectives as a result of private benefits. They are also viewed as being
exempt from undue influence of the CEO. Other researchers, on the other hand, maintain that
there is no relationship (Finkelstein & Mooney, 2003; Dalton et al., 1998).
Another stream of empirical research has examined the relationship between board size
and performance. There appears to be an advantage for larger board size, with an optimal board
size generally ranging between eight and nine directors (Lipton & Lorsch, 1992) whereas Jensen
(1993) maintains seven or eight directors is ideal. The advantage for larger board size is the
greater potential knowledge possessed by each director of the board which is valuable for
monitoring and advising. This is evident when the need for information is greater (Coles, Daniel
& Naveen, 2008; Guest, 2008). Despite the advantages identified, there are also several
disadvantages. First, the coordination and communication among large boards are identified as a
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problem. Jensen (1993) points to the logistical challenge to arrange board meetings and then to
achieve consensus thereby resulting in slower, more cumbersome, less efficient decision making.
Second, it is far more difficult for board members to share a common vision, communicate
effectively with each other, and achieve consensus that is founded on the different points of view
of the directors (Lipton & Lorsch, 1992). Finally, the accountability of each director in
exercising diligence is more difficult to determine because the cost of ‘free riding’ is affected by
board size; that is, the greater the board size the lower the cost for any one director not to exercise
diligence.
Another factor, CEO duality—that is, the practice of one person serving as a firm’s CEO
and Board Chair—has attracted considerable research interest by linking board structure and
performance. This factor is influenced strongly by the institutional and legal environment. In the
US, the CEO is typically the Board Chairman whereas in other environments, such as New
Zealand, United Kingdom, Canada among others, there is a greater separation between these roles
(Fox, Walker, & Pekmezovic, 2012). In instances where the board structure splits these two
roles, the identified advantages include effective monitoring and control of the CEO because he
or she will be unable to use his/her power as board chair to select directors that will not likely
challenge the actions of the CEO (Fama & Jensen, 1983). Others maintain CEO duality
establishes unambiguous leadership through a single individual by which he or she may make
better and faster decisions, and as a consequence, outperform other firms that separate the two
positions (Donaldson & Davis, 1991; Peng, Zhang, & Li, 2007). The inconclusiveness of the
research has led some researchers to attempt to specify the contingencies under which CEO
duality may enhance or constrain firm performance (see Dalton et al., 1998 for a meta analysis of
this research).
Finally, stock holding by board members is identified by researchers as contributing to
performance. It stems from the division of corporate ownership and control. It is maintained that
one of the fundamental causes of poor financial decisions undertaken by directors is that they are
not spending their own money—they are spending other people’s, that is, the money of
shareholders. Jenson and Meckling (1976) point out the problem of agency arises ‘because
managers cannot capture all of the gains if they are successful, and will not suffer all of those
losses should the venture flop, they have less incentive to maximize wealth than if they
themselves were the principals’ (p. 305).
Despite the inconclusiveness of the debate about the factors and the relationship between
ownership and performance, one aspect that unites most of these studies is that they are primarily
using the factors as proxies for the board and the nature of the interactions among directors,
between the board and the shareholder and the board and CEO. Indeed, the inner workings of the
board have received less attention despite the call for attention to context and board process
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research (Huse, 2005; Pettigrew, 1992; van Ees et al., 2009). An alternative perspective, broadly
identified as a behavioural approach to governance, maintains that the very issues unaddressed by
ownership structure are critical in gaining an understanding of the role of the board and its
relationship to performance. Indeed, boardroom behaviour is influenced by context and
‘forgetting to consider human and social of the board of directors…is somehow denying the
complex and richness of the social nature’ of the behaviour of directors (Simoes, Kakabase, &
Ramos, 2013: 6).
Proponents of this perspective maintain that structure does not lead to value creation per
se, but rather it must be employed in some way to be useful. As Van den Berghe and Levrau
(2004) point out, ‘Structures are no guarantee for an effective board working: they are only a
facilitator. Structures are “brought alive” by people’ (p. 467). Hence, the behavioural approach
evolved, where board dynamics, that is, the behaviour of directors involves the ability to make
decisions in order to achieve the board imperative of value creation. This suggests that while
structure seldom leads to performance differences on their own, the behaviours (interactions,
decisions undertaken by the board) influence governance outcomes which lead to performance
differentials. This behavioural approach overcomes the limitation of agency theory of whether
structure or behaviour is the primary concern (Huse, 2005). Understanding how structure and
behaviour interact to affect the value creating ability of the firm is a necessary condition for
directors to make effective decisions concerning the strategy, monitoring, and control of the firm
(Zahra & Pearce, 1989). In an empirical study of the role of non-executive directors Roberts,
McNulty & Stiles (2005) found that the interactions and relationships between independent
directors and executives influenced board effectiveness. They argue that the processes of
accountability within the board, comprising ‘challenging, questioning, probing, discussing,
testing, informing, debating, and exploring’ informs an understanding of board dynamics and
provides insight to the activities of the board so it can be effective (p. 12). Their research
suggests that the key to board effectiveness involves the degree to which independent directors
acting independently and collectively create accountability within the board in relation to both
strategy and performance.
In essence, what we are asserting is that ownership structure shapes the structural
elements of the board. The empirical findings of the relationship between ownership structure
and firm performance are both inconclusive and limited to only listed companies. It does not
provide an understanding into the ways in which ownership structure affects board dynamics,
which may in turn, influence firm performance. We see leadership and governance processes
interacting in complex and complementary ways. This focus takes us closer to interactions
within the board. Our discussion raises some questions. How does the ownership structure
influence governance and leadership in a listed state-owned enterprise? What are the
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implications for boards? To date, researchers have not explored interactions between ownership
structure and boards of listed state owned enterprises in the context of the airline industry,
missing key ways that boards can enhance governance effectiveness. In addition, theory
development is bereft of approaches which delve deeply in the experiences of directors to
understand how governance and leadership processes interact thereby affecting subsequent
decisions that are made. To investigate these issues, we conducted a longitudinal case study, as
reported next.
Research Setting and Design
Given that we wanted to understand the ways in which ownership structure influences
governance and leadership processes over time, a process research design was adopted. Process
research ‘is concerned with understanding how things evolve this way’ (Langley, 1999, p. 692).
It is particularly well suited for the study of processes as ‘the sequence of individual and
collective events, actions, and activities unfolding over time in context’ (Pettigrew, 1997, p. 338).
This process focus for our research also requires a longitudinal case study approach. The
longitudinal case study approach is designed to generate detailed insights of how the ownership
structure influenced leadership and governance processes as they unfolded across a range of
activities. Accordingly, this study answers the call of governance researchers for more process
research between macro, meso and micro dynamics and how these forces shape the relationship
between directors and their actions (Huse, 2005; Pugliese et al., 2009; Zahra & Pearce, 1989).
Consistent with the focus of our research question, the leadership and governance process
interactions surrounding the board-government relations, the board-CEO relations and the within
board relations among directors are examined.
This paper is part of a larger study exploring how governance and leadership processes
interact over time to influence performance (Erakovic & Jackson, 2012). Within the larger study,
we are collecting data from 10 organisations with varied ownership structures from across
disparate industries. We are also examining the role of nominee directors of the top 100 listed
firms on New Zealand Stock Exchange given the need to take into consideration interests of
future shareholders (Noonan & Watson, 2007). Because this paper investigates how ownership
structure influences leadership and governance interactions over time affecting performance a
single longitudinal case study is used. This design aided in the opportunity to understand the
relationships examined in this paper, as access to current and former board members and CEOs is
recognised as a barrier to governance research (Huse, 2005; LeBlanc & Schwartz, 2007; van Ees
et al., 2009). Moreover, the opportunity to study the board of a listed New Zealand SOE, which
has not previously been investigated to the best of our knowledge, provided insight to an under-
researched topic. It also provided an opportunity to capture the richness and complexity of
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leadership and governance processes unfolding within Air New Zealand over a 12 year time span.
Thus, the research design aided in explaining the results observed and how the leadership and
governance processes may have been influenced by the ownership structure. In light of the
potential advantages of a single embedded case design (Yin 2003), we reasoned that these were
important benefits that offset concern about generalizability gained from the use of multiple cases
(Flyvberg, 2006; Langley, 1999; Yin, 2003).
Data collection. Data was collected from multiple sources and archives. In total, over an
8-month period a total of 12 interviews were conducted. Of the total interviews, 10 were
conducted with former and current chairs and directors and two with CEOs, including the current
CEO. Each interview was conducted by the same two researchers to enhance trustworthiness.
The interviews were all digitally audio-recorded and transcribed and ranged in length from 40
minutes to 90 minutes.
Given hindsight bias and the limitations of memory associated with retrospective accounts
(Golden, 1992), interviews were triangulated with secondary publically available data sources
such as published articles in industry publications. Articles in the popular press, the Institute of
Directors, and contemporary magazines were also reviewed. Press releases detailing the growth
plans for Air New Zealand along with annual reports, New Zealand Stock Exchange reports
along with government documents, such as briefing notes for Shareholder Ministers, were
reviewed.
In order to draw inferences about how activities, processes, events between the
board/government, within the board, and by the board and CEO were shaped by ownership
structure, we focused our attention in this project on CEO selection. This focus allowed us to ask
about the process of selection, their role as directors, and how interactions evolved over time.
Contemporary governance research highlights CEO selection and termination as one of the most
important tasks undertaken by the board (Carter & Lorsch, 2004; Hermalin, 2005). Given its
importance for the tasks exercised by boards for value creation, we considered it as key to
understanding how ownership structure influenced leadership and governance processes in the
context of a key decision—the selection of CEOs. Thus CEO succession planning, personal and
board leadership, knowledge, and decision-making, and the nature of the board-government
relationships, formed the key constructs in our operationalization. The questions were semi-
structured. Typical questions sought to identify the roles undertaken by the directors and how
they changed over time. Inquiries into knowledge sharing included ‘how proactive was each
director in seeking information?’ Questions pertaining to director decision making included ‘how
were you involved in the CEO succession planning?’ We captured insights about the mixed
ownership model by asking how it influenced the activities undertaken by the board. We also
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invited comparisons, based on their own directorship experience, of the similarities and
differences for the Air New Zealand board.
Analysis. As we entered the field we were guided by concepts such as ownership
structure, decision making and succession planning, and used the analytic induction and constant
comparative methods to iterate between induction and deduction in our analysis (Langley, 1999;
Corbin and Strauss, 2006). Data analysis began after conducting some initial interviews. Memos
were created, for example, in which the CEO succession planning process was delineated, the
role for each actor, the capabilities sought for each prospective CEO, mentoring, and performance
along with how leadership was exercised and by whom in this process. This provided an
opportunity to explore how this critical board task unfolded over three iterations of CEO
succession. Guided by our research question we closely studied the interactions between the
board and the shareholding Minister (government), the board and CEO, and within the board.
We looked at ownership structure and its influence in shaping governance and leadership
processes over time in the context of CEO succession, and how these interactions were enabled
and hindered given the ownership structure. The iterative process of data collection and analysis
continued until we reached theoretical saturation after gathering sufficient data on the board’s
role in CEO succession given its ownership structure.
Air New Zealand research setting. The empirical setting for this paper is the board of
directors and interactions between the board-and government (its major shareholder), the board
and the CEO, and among the directors of a listed airline in New Zealand between 2002 and 2014.
The airline industry lends itself to the study of ownership structure and performance
because many publicly owned and operated national flag carriers have been fully or partially
privatized (Backx et al., 2002). The airline industry is characterised as being capital intensive,
labour intensive, having high fixed costs and generating low returns on investment (Dempsey,
2008). As whole, the industry faces severe business risk in the form of highly cyclical and
intensive competition and severe financial risk in the form of high debt-to-equity ratios which
increase the variability of earnings and the chances of insolvency (Dempsey, 2008). In a review
of the inherent risks in the airline business, Professor Grita and his colleagues (2003) identified
the presence of fixed costs, presence of volatile input factor costs, such as labour and fuel, the
cyclical nature of the business, and the level of competition within the industry.
Although the motives for ownership restructuring through privatisation are diverse, they
typically include improving financial performance and operating efficiency as the key objective.
The privatisation process can lead to partial privatisation in which potentially significant control
remains in the hands of the public owner (Backx et al., 2002). The partial privatisation of an
airline produces a mixed ownership model which embodies elements of both state and private
ownership. This mixed model of ownership or listed state owned enterprise model may change
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over time through a multi-stage asset sale. Accordingly, the model may be viewed as a fixed
arrangement or a transitional state depending on the policy statements of each country and its
government. Studying the case of Air New Zealand following the rescue package allowed us to
explore how ownership structure influenced board relations which may, in turn, affect
performance.
Air New Zealand is an airline with a history serving domestic customers dating back to
1939. Building on this long tradition, it was the leading airline in its home market. Air New
Zealand was a state-owned airline until 1989. A consortium comprised of an investment
company (Brierley Investments) and an overseas airline (Singapore Airline) acquired the capital
and subsequently listed the airline on the New Zealand stock exchange in October 1989, with the
Crown retaining specific rights. While viewed as a large company, in international terms within
the industry, Air New Zealand was a medium size player.
Traditionally home market focused, Air New Zealand started an international expansion
initiative which involved the acquisition of Ansett airline in Australia. In a decision by the board,
the takeover of Ansett was viewed as a strategy by which Air New Zealand could gain a market
presence in Australia. An initial purchase of a 50 percent stake of Ansett Australia was acquired
in 1996. Acquisition of the balance was completed in 2000. Subsequently, the board learned the
extent of their misstep in their acquisition decision. Air New Zealand announced a net loss (after
tax, earnings from associates and unusual items) for the financial year to 30 June of NZ$1.425
billion, mainly arising from losses by the Ansett Group. With a recapitalisation of $885 million
from the New Zealand government, the airline was once again nationalised in 2002. This
ownership arrangement once again changed the status of the airline. It was, at the time, the first
and only case of a mixed ownership model in New Zealand with the Crown as major shareholder
at 83%. From its inauspicious beginning as a listed SOE in the New Zealand transportation
sector, Air New Zealand became a substantial and rising force in global aviation industry. By
2014, New Zealand Airlines emerged as a peer recognised, award winning company with annual
revenue exceeding $2.3 billion and 11,000 employees.
Board Composition. The board of directors involved with turning around a failed airline
into a success in one of the most competitive industries had no airline experience. Rather than
industry experience, directors were selected for a combination of their experiences, skills, and
capabilities among other characteristics. As a director pointed out, ‘The thinking that goes into
that, in an airline sense globally, is very unconventional thinking’. Among the directors,
entrepreneurship or ‘market-orientation’ was shared widely. The business experience ranged
from leading start-ups to sustaining international subsidiaries to growing established firms.
Several of the directors had been CEOs of large companies including banking, agriculture, and
pharmaceuticals. Some of the directors brought a financial background. Others brought
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expertise in marketing, tourism, engineering and safety. Collectively, the board brought a
diversity of experience and expertise that had unequivocal benefit in shaping board effectiveness.
They challenged and changed the conventional view of the industry and competition. The board
composition was dynamic. As an evolving board, the composition was adapted in light of
identified needs. As the desired outcome had been achieved in relation to engineering, the
director stepped down. Recognition of the need for tourism experience brought about another
change to the board with the appointment of director with such experience and expertise. As
such, the composition of the board evolved over time, with director appointments retaining a core
set of experience, expertise, and capability while also adapting to newly identified needs.
In relation to director demographics, all of the directors were independent. None of the
directors were politicians, political administrators, or academics. Two of the directors were
women. All of the directors, except one, were New Zealanders. The opportunity to create a new
board allowed the infusion of diverse skills, experiences, and expertise needed to create value to
drive board reconstitution. Thus, the role of human capital in the reconfiguration of board
composition extends an understanding of the role boards play in moving towards more
sustainable business opportunities (Forbes & Miliken, 1999; Hermalin & Weisbach, 1988;
Johnson, Schnatterly, & Hill, 2012).
Ownership Structure and Performance in Air New Zealand
As we indicated earlier, ownership structure has mixed effect on performance as
discussed. Some research on ownership structure suggests that firm performance is affected by
these factors, and that such differences persist over time (Shleifer & Vishny, 1997). This section
of the paper focuses on the ownership structure in Air New Zealand over time as a listed state
owned enterprise. It identifies the ways in which the factors of insider/outsider ratio, board size,
CEO duality and the stock holding by board members shapes board structure, which in turn, may
affect performance.
Insider/outsider ratio. In the wake of Air New Zealand’s rescue package by the Crown,
the company required a new board. The financial collapse had been accompanied by the
resignation of nominees from Singapore Airlines and Brierley Investments with the remaining
Board directors ‘prepared to stand down at such time when their services are no long required’
(T2001/1918). Of critical importance was the identification of a Board Chair. Subsequent to the
need to identify the Board Chair, desirable qualities and capabilities were identified in
consultation with the Treasury Office. Two such qualities and capabilities involved leadership
skills, identified as past experience leading a Board, and experience in achieving a successful
turnaround of a company. Along with the absence of conflicts of interest and sufficient time
available and energy to dedicate to Air New Zealand “given the enormity of the task ahead”
(T2001/1918) the identification of a suitable board chair was not an easy undertaking. Because
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Air New Zealand was not envisioned to returning to its status as a state owned enterprise, the list
of prospective directors maintained by the Crown Company Monitoring Advisory Unit was not
accessed. Thus a search process for the board chair was initiated. The search resembled a
process typically used within most private firms. Following the appointment of the board
member and Chairman-designate and with the upcoming Air New Zealand Annual General
Meeting scheduled for December 2001, there was simply too little time for the Chairman to
‘generate core competency templates for directors’ as he had planned to inform the identification,
selection and nomination of director appointees in consultation with the Minister of Finance as
the shareholding Minister responsible for Air New Zealand. In consultation with the
Shareholding Ministry, a brief reprieve was negotiated given the willingness of four directors to
extend their tenure until new directors were co-opted. This short extension of six weeks allowed
the Chairman to purposefully select each director based on a ‘template of skills and expertise
required for directors’ in consultation with the Treasurer/Minister of Finance. The Chairman,
with the endorsement of the Treasurer/Minister of Finance, revamped the board to improve board
capacity to render guidance to the Chairman particularly with an entrepreneurial orientation along
with experience or specific competency/expertise, serving as ‘important prerequisites for leading
a turnaround of the national carrier’.
The insider/outsider ratio of the board varied slightly with respect to the role of the CEO
as a director. The initial CEO appointed retained his role on the board and his role as director
pre-dated his appointment as CEO. This was permitted as the Constitution (2002) allowed for a
Managing Director (2002, Kiwi Shareholder Application Memo, Corporate Counsel). However,
in the subsequent CEO appointments, a separation was instituted and neither one was held a
directorship as Managing Director on the Air New Zealand board. The most recent CEO
appointment stated his preference for the model that separates his role from that of the directors.
He pointed out, ‘I think I need to be 100% focused on management and the Executive and I think
they need to be 100% focused on the governance side of it’. He continued to explain his
preference for the model in Air New Zealand: ‘In America that gets very mixed because you are
president of the company, which is chairman of the board as well as the CEO. And I don’t think
that model works as well as the European model with what we’ve got here in New Zealand’.
Thus, with the exception of the initial CEO who was also a director at the time and retained a
position as Managing Director, the directors of the board for Air New Zealand were independent.
There was no appointment to the board by the Crown.
Board size. The Air New Zealand Constitution required a minimum of five members at
all times and a maximum of eight. In keeping with this requirement, the board size immediately
following its reconstitution was set at seven directors. This size allowed the Chairman some
flexibility to adjust the board size as needed; however, the size remained constant with the
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addition of new directors to replace outgoing directors in a sequenced and orderly manner. A
greater rate of transition occurred in 2011 as many of the original directors appointed as part of
the reconstituted board in 2002 reached the preference for 9 year directorship terms. This change
in directorship did not permanently alter the number of directors serving on the Air New Zealand
board. The transition of the Board Chairman was handled in a similarly orderly manner.
Although the Board Chairman maintained that ‘9 years is long enough for a director’, he delayed
his resignation at the behest of the board. Collectively, the directors did not wish to have a new
CEO and Chairman simultaneously. Following 13 years in his role as Chair he resigned as Chair
and remained on the board as a director for six months prior to fully stepping down in 2014. This
permitted the appointment of the Deputy Chairman to the role of Chairman with full three years
of directorship experience on the Air New Zealand Board.
CEO duality. The structure of the Air New Zealand board was designed to emulate that
of private sector firms. Although not required by the Companies Act 1993 and the New Zealand
Stock Exchange governance code, the board chairman role was separate from the role of CEO.
Stock holding by board members. The constitution for Air New Zealand required an
independent chairman and the two chairmen who have acted in this role since 2002 have adhered
to this requirement. In addition, the change in the status of any director, that is the loss or gain of
independence, is required to be disclosed in the market immediately. The standards for
determining the independence of a director is set out in the New Zealand stock exchange. There
have been no disclosures of a change in status by the directors of the Air New Zealand Board
prior to or following the GFC.
The factors of insider/outsider ratio, board size, CEO duality, and the stock holding by
board of directors provided a lens through which Air New Zealand was examined. As a listed
company, the board was required to adhere to the listing requirements for the New Zealand Stock
Exchange or explain any instances of non-compliance. As a SOE, the structural attributes of the
board were also influenced by its distinct status with government. Taken together the factors that
constitute ownership structure seem to influence the shape of the board. Thus, ownership
structure appears to indirectly affect performance by defining aspects of the board. We now turn
to the relationships between the board and its major shareholder, the board and CEO, and the
directors to gain a better understanding of how these interactions affected board effectiveness
and, in turn, firm performance.
Board Interactions and Relationships
The factors described in the previous section allow for insight into the external conditions
that shaped the structure of the board for Air New Zealand. However, much depended on the
board interactions and relationships that affected board effectiveness and its capability to identify
and develop ways to potentially improve profitability and growth.
14
Creative search for directors. Critical to the success of the board was the creative
search and selection of directors in each phase of Air New Zealand’s life cycle from turnaround
to stabilisation to profitable growth. In the initial search for potential directors as well as its
contemporary search, the ‘right combination’ of knowledge, skills, experience, and ‘chemistry’
fit and values alignment was essential. Several of the directors, particularly those invited to serve
as a director during the darkest days of the airline recalled their motivation to accept the
directorship. As one director point out, it involved a personal motivation to serve. The director
stated:
For me it was an iconic brand…at that stage we all would have done it for nothing…The
company needed some good leadership and I thought I could add value with my
background…Plus when I met the Chairman, I realised that he was putting together a
group of people that he had selected that would work well together, and I thought that he
would be a very good Chair.
Another director expressed his motivation to serve on the reconstituted board after he had done
some due diligence on the company before he accepted. He pointed out:
We were in the process of the company being in serious difficulty, still having difficulties
with the collapse of Ansett; there were a lot of potential liabilities that we had to deal
with, the company wasn’t properly capitalised even with the Government’s money. We
had an aging fleet, serious issues with customers and staff, engineering issues, so there
were quite a number of issues in those earlier years. As a board we probably got to know
each a lot because we spent a lot of time together in those first couple of years.
Another director who accepted appointment to the board more recently in 2011 recalled her
motivation to accept the directorship:
The fact that you are a CEO or an accountant or whatever, that skill level is accepted. So
it is not like it’s a test of skills, it is much more chemistry and contribution…I mean Air
New Zealand is one of New Zealand’s great companies isn’t it and I looked at it and
thought I could add value to the board, and looked at who else was on the board.
Respected…knew quite a few of them.
The directors expressed their personal motivation to serve on the board as a combination of
motives with some framing it in terms of national pride or service whereas others motivated by
the sheer enormity of the challenge. Collectively the directors each accepted the appointment to
the board because they brought value to the board and the airline. In short, there was no sense of
free-riding or having accepted the appointment to ‘rubber stamp’ initiatives from management or
government.
Partnership with management. The board was actively involved in discussing and
endorsing strategies. The strategies were, in part, informed by the quality of information that the
15
board received as part of the board pack coupled with their expertise, experience, and skill. This
was particularly evident during the initial turnaround and stabilisation of the airline. As one
director recalled the data concerning the wage negotiations for engineers did not match his
understanding. This particular director had extensive experience with engineers along with a
large network developed over a life time having grown up in New Zealand. The director noted,
‘he was a board member [as well as CEO] and it was my job to try to understand…I wasn’t paid
to love him’. The board encouraged the CEO to investigate the issue further and report at the
next meeting.
Another director reflected on the success of Air New Zealand:
My time was so successful because people weren’t afraid to question management, even
on so-called dumb questions, and they put management under some stress at times... But
I’ve seen some boards who are too kind. They don’t put them [CEOs] under real
investigation, “Don’t tell me that without justification,” but in a kind way.
The openness and candor of the directors allowed a fulsome dialogue of issues. As the director
pointed out, ‘I think boards and management can do things in a very team spirit if they know
everybody is open with each other and not take a question as a threat’. Another director echoed
the importance of quality of relationship between the board and CEO stating, ‘you build trust
about how you can have integrity in these processes…the CEO interface with the board is about
having a safe environment at the board table’. It also involved a recognition of which issues were
appropriate to bring to the board. Such issues were characterised by one director as involving ‘a
major fork in the road’. These issues were strategic, such as alteration of major historical routes,
and capital intensive like the billion dollar asset purchase of new aircraft. Importantly, the nature
of the issues for board consideration did not extend to operational aspects, such as the
refreshment of the corporate livery for all aircraft. Key to building a partnership relationship
between the CEO and board involved a willingness to understand different perspectives, a board
operating as a whole rather than as factions, and facilitating positive interactions without
controlling everything. The board was able to create an environment in which the board and
CEO participated in open and critical debates. However, the dissenting opinions were framed in
terms of value generation and their role as directors rather than as an individual/personal affront.
There was no sense of ‘us and them’ between the board and CEO. Together, they acted in the
collective interest of the shareholders.
Engagement among directors. The board worked together to create and reinforce the
kind of environment which enabled involvement, commitment, enthusiasm and support. Creating
a high level of engagement among the directors of the board involved participation in key
activities. As the selection of a new CEO was a responsibility viewed as being among the top
three activities of importance by the board, it is our focus for engagement processes among
16
directors. One director pointed out, ‘There can’t be many bigger decisions for a board than
putting the right person in the CEO role. If there is one, I’d like to hear what it is…He’s got a lot
of responsibility there to basically make the strategy happen’. In carrying out this responsibility,
the board was involved throughout the process. One of the initial activities by the board included
the identification of the qualities for each successive CEO to bring about the future envisioned by
the board that the organisation may face. At a dedicated board-only session, the directors
participated in a white board exercise in which they identified the desired and necessary skills,
attributes, expertise, and experience. This list desired attributes was collectively developed.
Having a cadre of directors experienced in the process provided other directors new to CEO
selection an understanding of the process as it unfolded as prior experiences were shared.
Collectively, the board gained knowledge about the calibre of prospective internal candidates for
the role through board presentations, informal discussions over lunch, and board subcommittees
in which they had participated. An awareness of potential external candidates was acquired by
the board following the preparation of a candidate short list. As a board, the list of potential
internal and external candidates was reviewed and winnowed. Subsequent to psychometric
testing, the board interviewed each final prospective candidate. As a director pointed out, ‘the
final interview is people making their own judgments independently and then, when they’ve
made their own judgments, having a discussion’. Following the final interview, all of the
directors were involved in the decision to select the next CEO.
Shared understanding with government. The relationship with Air New Zealand’s
largest shareholder, the Ministry of Finance, was an important relationship managed exclusively
by the Board Chairman. A meeting held early in the tenure of the Chairman helped to set the
tone for the relationship between the Chairman and Minister Responsible throughout the 12 year
period. From the outset, the Chairman was explicit in his resolve that there was to be no political
influence from government in governing the airline. This commitment was evident in how the
board managed the CEO selection process in 2002. Candidates were shortlisted and interviewed
for the position. Unfortunately, they did not meet the expectations of the board for the challenge
that lay ahead. With an understanding that a subsequent search would take at least six months, a
director offered his services to lead the airline turnaround as CEO. The decision to accept this
offer was a de facto decision taken by the board. The Minister Responsible was notified 15
minutes prior to the press conference. Subsequent appointments of the CEO remained the
purview of the board with no political influence on the decision.
The most recent CEO pointed out that his meeting with the Shareholding Minister (the
Treasurer) affirmed the absence of political influence for the airline. The current CEO noted that
‘the Treasurer and other ministers have been very adamant, “You won’t hear from us” and that’s
how we want it to be; that is how I want it to be as well’. He added:
17
If you go back over the last decade there has not been a single incident under a Labour or
a National Government of any intervention whatsoever. An independent Chairman, an
independent Board, we act in the interests of all shareholders, which is a corporations law
requirement, that is just exactly how we would do it…So I don’t feel the Government’s
ownership in Air New Zealand in the way business is run or managed at all. Which
sounds really odd for people who are not familiar with it works but it’s just, yes just
generally has never been an issue.
The directors echoed an absence of influence between the major concentrated shareowner
and the decisions undertaken by the board. The role of the board, as one director stated, is as
follows:
To ensure the company is sustainable and adding value to the shareholders…You will
look at the long term view for the company and that includes diversity…profitability…
how you interact with your stakeholders, your suppliers, health and safety…because that
is not sustainable if you don’t and it is certainly not going to add value to shareholders.
Another director pointed out that a large and concentrated shareholder did not provide a sense of
security ‘because security in the airline industry is like an oxymoron…it is volatile’.
Concentrated ownership had the potential to limit strategy, such as the pursuit of mergers or
acquisitions, as one director pointed out. However, such considerations did not appear to affect
the strategies pursued by Air New Zealand.
Deliberate and proactive effort to build and maintain a relationship with the largest
shareholder was undertaken by each Chairman. Setting the tone for an effective working
relationship with the Shareholding Ministry involved an awareness of issues that could
potentially create awkwardness or embarrassment for the government and being proactive about
managing them. Both board chairmen operated a ‘no surprises policy’. In essence, the Board
Chairman maintained that the Shareholding Minister was ‘entitled to expect that if there were any
issues that he needed to know about in a political sense or a political embarrassment, he should be
able to rely on me keeping him informed so that he never got surprised’. In one instance this
involved informing the Minister Responsible about an impending public announcement 12 hours
prior concerning a strategic alliance with an international airline. As a Chairman pointed out, ‘it
is that sort of information but not consent’. Both Chairmen acknowledged such information
sharing also demanded a sophisticated understanding of the nature of information shared. As one
of them pointed out, such sharing necessitates ‘being sensitive to (a) your requirement as a listed
company, and (b) the inevitable pressure that a minister comes under if has information that he is
probably better off not to have’. The management of the major shareholder relationship involved
using informal mechanisms such as casual conversations and discussions to having formal
mechanisms such as meetings periodically.
Discussion
18
In this paper, we set out to investigate how ownership structure influences performance.
Based on a longitudinal case study, we have investigated the influence of ownership structure and
board interactions (internal and external) that affect board effectiveness, which in turn, influences
performance. The question that this study addresses is of fundamental importance in times when
regulatory change seems to be a key challenge for boards in most industries and countries, and at
time when governments have injected an unprecedented amount of capital into formerly private
companies.
The results of this study suggest that ownership structure-performance link takes place
through board three sets of board interactions appear to influence board effectiveness. On the one
hand, the factors of insider/outsider ratio, board size, CEO duality and the stock holding by board
members are structural attributes that shape the board composition for a listed SOE. We found
that the consistent condition of low insider to high outsider ratio appears to allow the acquisition
of knowledge about how to create value. Our finding is consistent with empirical studies that
have found boards with higher ratios of non-executive directors improve firm performance (Fauzi
& Locke, 2012). Although this finding may suggest that the independence of directors on boards
of listed SOEs increase board effectiveness, there may be intervening processes that influence a
structural attribute of the board and firm performance (Dailey et al., 2003; Pettigrew, 1992).
The size of the board, which remained relatively constant over time, allowed for short
time periods when new directors were appointed and others stepped down. The size is consistent
with the ideal size posited by some scholars (Lipton & Lorsch, 1992) and appears to be well
coordinated and inclusive of diverse experience, expertise, and skills. The board did not appear
to suffer from impediments associated with size as its pace of decision making, candid
discussion, clear responsibility, and risk taking appear to influence board effectiveness (Lipton &
Lorsch, 1992). This may be because the board size of seven directors is only slightly larger than
the median board size of six directors for New Zealand firms (Fox et al., 2012; Fauzi & Locke,
2012). It also lends support to the empirical findings of Coles, Daniel and Naveen (2008) that
complex companies, defined as those with many business segments, external contracting
relationships, leveraged firms and in specialised industries, may benefit from large boards as
more information is brought to the directors’ decisions. They concluded that ‘At the very least,
our empirical results call into question the existing empirical foundation for prescriptions for
smaller independent boards’ (p. 356). Given that it is a mixed ownership model of an
organisation in a specialised industry, the larger than median size board within New Zealand for
Air New Zealand appears to contribute to board effectiveness.
The separation of the CEO and Board Chair role did not appear to lead to protracted
decision making nor decisions that eroded value rather than created it as maintained by some
researchers (Donaldson & Davis, 1991). Moreover, the appointment of ‘CEO-friendly’ directors
19
was precluded given the nature of the practices of the major shareholder. Specifically, it was the
responsibility of the board chairman to proffer the name of a prospective director to the
Shareholder Ministry. As such this delineation between Board Chair and CEO responsibility
diminished the likelihood of a CEO acting in his interest by nominating compliant directors
(Fama & Jensen, 1983). Although the constitution for the airline did not prohibit the appointment
of directors in the absence of approval by the major shareholder, it was recognised as an
untenable risk as all directors must stand for election at the Annual General Meeting. Thus the
power of veto for any potential director appointment to the board meant that this was a board
activity rather than a CEO activity thereby supporting agency theory from a policy standpoint.
The final factor, stock holding by directors of the board, was not found to affect
performance. Although compensation by performance incentives is viewed as a mechanism by
which the alignment of potentially diverse goals can be realized, this mechanism was not used.
The independence of the board chairman did not appear to constrain value creation. Similarly,
the independence of the board of directors was not considered as an impediment to performance.
The identity of the major concentrated shareholder did not appear to have a direct impact on firm
performance. The appointment of directors was not a mechanism by which the major shareholder
used ownership concentration to assert control in an attempt to implement an ideology and/or
aspiration-driven objectives. The composition of the board suggests the selection of directors
involved providing human capital to facilitate the achievement of strategic objectives. As Giles
and Watson (2011) found in their empirical research of New Zealand’s stock exchange largest 50
listed companies between 1999 and 2009, ‘ownership in general on listed companies has little to
no effect on the growth and capitalisation of the observed firms’ (p. 15).
These conventional factors of ownership structure provide an initial insight into the
governance structures that enabled a firm to successfully emerge from failure with government as
a major shareholder. There may be other factors that likely warrant consideration when exploring
ownership structure and composition such as human capital characteristics along with social
relationships (Coles et al., 2008; Johnson et al., 2012). Given the low rates of success in
emerging from a turnaround (Slatter, 2005), an understanding of the ownership structure in this
context provides a novel insight.
Joining a growing body of research (Huse, 2005; Roberts et al., 2005; Useem & Zelke,
2006; van Ees et al., 2009; Zahra & Pearce, 1989), we find utility in examining the behaviour
within boards in and around the boardroom. In this study we found three sets of interactions that
appear to influence the effectiveness of the board. These sets of relations are Board-government,
board-CEO, and board members. The quality of the interactions is critically dependent on the
nature of these interactions among each of these groups and the quality of effort spent on
developing and analysing the experience gained over time. Our focus on board interactions also
20
complements the current governance literature regarding the need for greater understanding of
behaviour. In the face of an endogenous shock such as the change from a private company to a
SOE, the ability of the board to adapt and evolve enabled it to respond to an externally-triggered
shock, such as the GFC. Thus our study expands awareness of the role of the board in adapting
to internal and exogenous shocks like the GFC. Our analysis shows these interactions to be
critical units of activity, driving the efficiency of the board, its processing of experiences and the
relationships that come to enable or constrain performance. A key implication is that what boards
do and how they do it affects performance. This revises the literature that emphasizes that firm
performance is affected by ownership structure but ignores the activities of directors of boards. It
is this dialogue between boards-shareholder, board-CEO and directors that influences board
effectiveness and fosters performance (Erakovic & Overall, 2010).
More work is needed among this interactive set of relations. For instance, future research
could consider how these interactions vary with a different major shareholder such as an
institutional investor or how these interactions are affected in the absence of the market influence
(i.e. SOEs). By moving away from a singular focus on ownership structure, future researchers
might engage in a focused exploration that tracks the interaction between a dyad (for example,
board-CEO) to gain a richer deeper understanding of how these interactions change over time.
Practical implications. Our analyses suggest that ownership structure influences the
shape of the board and has limited direct impact on performance whereas the relations between
the board and the major shareholder, the board and CEO, and the directors are malleable and
more closely linked to effectiveness of the board which is, in turn, linked to performance. This
highlights a need to develop processes that support board effectiveness. At the board-government
set of relations, directors need to recognise the explicit influence that a major concentrated
shareholder can exert vis-a-vis board appointments along with the pursuit of strategic
opportunities. They need to find ways to capitalise on the relationship, as our case analysis
reveals. Key to this process is an agreed understanding of how the board and the major
shareholder will interact over time. Ideally, this should be undertaken in ways that benefit the
effectiveness of the board. The Board-CEO interactions need to adapt over time, given the
experience of the CEO. However, the relationship is best approached as a partnership rather than
one of monitoring/controlling (Useem & Zelleke, 2006). Directors need to recognise that their
ability to influence board decisions requires processes that move individual knowledge,
experience, and skills to the group. Because board composition evolves directors need to be
entrepreneurial in how the board is assembled so that they can account for these temporal
differences and further value creation. Directors also need to recognise that their ability to adapt
to external environmental changes is only one driver of change. The perception of
entrepreneurial opportunities by boards and the execution of these options need to be coordinated
21
and integrated for firm performance. Directors can develop these capabilities and processes in
ways that will benefit the board and enable it to differentiate itself from others and succeed in its
markets and evolve.
Conclusion
The conclusions presented in this paper are limited in scope and methodology. Our study
has focused on the effect of ownership structure on performance. A listed SOE seemed an ideal
ground for this study because of its recent nature in New Zealand, at least in the industry studied.
This might limit the empirical generalisation of our observations to this context. Our theoretical
generalisation is also somewhat limited to boards of listed SOEs.
In conclusion, we assert that understanding sources of variation in the link between board-
performance is an important issue and gaining considerable attention from researchers and
practitioners like. This paper advances our assertion that board interactions influence firm
performance and that the interactions between the board-major shareholder, board-CEO and
directors are particularly important in this regard with an understanding that structural attributes,
such as the ‘usual suspects’ (Finkelstein & Mooney, 2003) may provide an indirect link to board
effectiveness. Our analyses have shown that processes such as a fostering partnership with
management, engagement with directors, and shared understanding are key mechanisms through
which board effectiveness is developed and interlinked with performance. Boards can efficiently
use these processes to generate new value thus setting the stage for successful performance.
22
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